If you’ve ever tried to finance a car, rent an apartment, or get a store card, you’ve likely had to jump through a few hoops first. One is passing a credit inquiry which can make you feel anxious. Aside from the fear of being denied, you may also worry about how a new credit application will affect your score.
Depending on the type of inquiry that’s done, it can cause a temporary hit to your score, or have no effect at all. The outcome hinges on whether they do a hard or soft inquiry.
If you have no clue what either of these are, you’ll learn about both in more detail below. Credit inquiries account for 10% of your FICO Score, so it’s information worth knowing.
What is a Credit Inquiry?
Credit inquiries tell lenders whether you’re a good borrower. Before they extend you credit, they want to know whether you’ve missed any payments, how long you’ve had credit, and how many credit accounts you have open. How do they find this information? By getting a copy of your credit report from credit bureaus like TransUnion, Experian, or Equifax.
If you don’t have the best credit history, this can lead to lenders denying your application. However, the inquiry will still show on your report for a period.
Hard Inquiries
Also known as “hard pulls”, these credit inquiries happen when lenders or card issuers check your credit. Hard inquires are usually required for:
- Mortgages
- Apartment rental
- Student loan
- Auto loans
- Credit cards
- Personal loans
Soft Inquiries
Soft inquiries usually have nothing to do with new credit. For example, if you’ve ever gotten a pre-approved credit card in the mail, the company likely did a soft credit inquiry beforehand. They do this to see if you qualify for credit, and when you do, they’ll pre-approve you for the card. Soft pulls can also be used to help you pre-qualify for a loan.
Are you wondering how they could see your report without your permission? Soft pulls can be done without it.
Luckily, they have no impact on your credit score because soft inquiries aren’t usually done for a new credit application.
Examples of soft inquiries are:
- Loan and credit card pre-approval letters (if you respond to a pre-approved credit card offer, it becomes a hard inquiry)
- Checking your own credit score
- Background checks
- Insurance policy
- Employee screening
Things like cellphone contracts or cable TV can be hard or soft inquiries. If you’re unsure about which category they fall into, ask the service provider or lender before they run a credit check.
What’s the difference between the two?
With hard inquiries, you usually permit lenders to check your credit because you’re trying to acquire new credit. However, soft inquiries often happen without your knowledge and generally don’t involve you getting new credit.
Which Credit Inquiries Affect Your Score?
Hard inquiries affect your score, but only temporarily. The average person may see their score dip less than 5 points after a hard credit inquiry.
Other factors that influence how much of a hit your score will take after an inquiry is your credit history and how many accounts you have. For example, someone who has excellent credit and has had accounts open for ten years and applies for two new credit cards within a short period may not be as negatively affected as someone who has a “thin” file and does the same.
That said, one or two hard inquiries isn’t a huge deal and shouldn’t damage your score. However, if you apply for multiple types of credit at once, it could negatively affect you. Why? Lenders may assume you’re having financial trouble and are trying to get multiple lines of new credit to get buy. Thus, they see you as a high-risk borrower.
The good thing is that FICO scores only consider inquiries from the past 12 months, even though the inquiries stay on your credit report for 2 years.
Who can access your credit report?
Of course, you have the two major financial institutions:
Lenders: Banks, credit unions, and other financial institutions that you apply to for loans or credit cards may request your credit report to assess your creditworthiness and make lending decisions.
Creditors: Companies that extend credit to you, such as credit card issuers or mortgage lenders, may review your credit report to monitor your payment history and manage their risk.
Who can see your credit report
Here are 5 examples of people or organizations who can request to see your credit report besides lenders and creditors.
- Landlords: When you apply to rent a property, landlords or property management companies may request your credit report to evaluate your financial responsibility and determine if you’re likely to pay rent on time.
- Employers: Some employers, especially those in finance, government, or positions with fiduciary responsibilities, may request access to your credit report as part of the hiring process to assess your financial stability and responsibility.
- Insurance Companies: Insurance providers, including those offering auto, home, or life insurance, may check your credit report to evaluate your risk profile and determine the premiums they’ll charge you.
- Utility Service Providers: When you apply for services such as electricity, water, or cable, utility companies may request your credit report to assess your creditworthiness and determine whether a deposit is required.
- Collection Agencies: If you have outstanding debts that have been sent to collections, collection agencies may access your credit report to assist in their debt collection efforts.
Yes, government agencies can request to see your credit report under certain circumstances. Here are a few examples:
Government-backed loans: When you apply for government-backed loans, such as an FHA loan or a VA loan, the respective government agencies may request your credit report as part of the loan approval process.
Security clearances: For certain positions that require security clearances, government agencies may access your credit report as part of the background check to evaluate your financial stability and trustworthiness.
Law enforcement and regulatory agencies: In specific cases involving investigations or regulatory matters, law enforcement agencies or government regulatory bodies may obtain access to your credit report with proper authorization and under applicable laws.
Who can’t see your credit report
It’s important to note that in most cases, these entities must have a permissible purpose under the law and your consent to access your credit report.
Government agencies requesting your credit report must have a legal basis or permissible purpose to access it. Your credit information is generally protected by privacy laws, and government agencies must adhere to these laws when accessing and using your credit report.
How Inquiries Show up on Your Report
Where do inquiries show up on your credit report? You’ll find them towards the end split into two categories; soft and hard. Note that not all soft inquiries show up on your credit report; it depends on the bureau.
Preparing for Inquires
There are some things you can do to prepare for inquiries—hard ones in particular. Find a few suggestions below you can try before your next credit application.
Check your credit report
It’s critical that you check your credit report periodically. You’re entitled to one free credit report a year, from each of the three credit bureaus. Sometimes, you’ll find items on your report that are incorrect and could affect you when taking out new credit. Look for any hard inquiries that occurred without your permission. Having them removed can improve your chances of smooth sailing next time you apply for credit.
If you do notice something is off, contact the credit bureaus and let them know immediately.
Don’t apply for too many credit types at once
Some loans require rate shopping, such as auto loans, student loans, and mortgage loans. For this reason, when you make inquiries for similar types of credit, you have a 14-45 day grace period to shop around. This means all of these inquiries will be treated as a single one, so you won’t have multiple hard inquiries. However, if you apply for multiple credit cards at once, you will have several hard inquiries on your report.
Manage your debt
If you have large amounts of debt, it may be good to tackle that before getting new credit. Without doing so, you could end up amassing more debt; it could also decrease your chances of approval.
If your debt is overwhelming, consider debt consolidation or contacting each provider to see how they can help. It’s OK to take out new credit if you need it, but best to effectively manage the credit you have.
